Required Rate of Return Calculator
Calculate the minimum return required to justify an investment. Use CAPM, the Dividend Discount Model (Gordon Growth), or Target Capital Growth parameters.
CAPM Method
Dividend Discount Model
Target Accumulation
Typically the yield on 10-year US Treasury bonds.
Measure of systemic risk compared to the overall market (Market = 1.0).
Long-term historical return of the broad market (e.g. S&P 500).
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Required Rate of Return (RRR)
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Enter parameters on the left to calculate RRR.
*Minimum return threshold expected to justify the risk of the asset.
Risk-Free Rate baseline:
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Market Risk Premium (Rm – Rf):
Beta Risk Premium Penalty:
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Risk vs Return Trade-off (SML)
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Understanding Required Rate of Return (RRR)
The Required Rate of Return represents the minimum payout an investor demands to take on the risk of holding a specific asset. If the expected return of an asset falls below its RRR, the investment should logically be rejected.
The Primary Calculation Methods
1. Capital Asset Pricing Model (CAPM)
CAPM adjusts the hurdle rate based on the systemic risk (Beta) of the stock:
RRR = Rf + β × ( Rm – Rf )
2. Dividend Discount Model (Gordon Growth Model)
For dividend-paying equities, the hurdle rate comprises the dividend yield plus growth:
RRR = ( D1 / P0 ) × 100 + g
3. Capital Accumulation Method
The geometric compound annual interest rate needed to hit a future lump sum target:
RRR = [ ( FV / PV )1 / n – 1 ] × 100
Where:
- Rf = Risk-free rate baseline.
- β = Beta coefficient (relative volatility).
- Rm = Expected market returns.
- D1 = Expected dividend payout next year.
- P0 = Share price today.
- g = Constant growth rate.